Non-banking financial companies (NBFCs) have started increasing the share of bank loans in their overall funding mix to avoid paying more interest rates in the debt market and to avail higher funds in the wake of buoyant credit demand, senior industry members said.
Two years of Covid-19 related business challenges significantly impacted banks’ credit growth, including outstanding bank credit to the NBFC sector, they say.
“Everyone is growing, and money is the raw material for all the NBFCs. You need a large quantum of capital which you only receive from banks,” Mahindra & Mahindra Finance MD and vice-chairman Ramesh Iyer told Moneycontrol.
“It is because of growth (the shift towards bank loans). When you are not growing and need limited money, you can always take it from different sources but once you need to grow, then you will go back to sources where you can get a large sum and banking is a very large support system,” Iyer said.
Mahindra Finance’s total borrowings stood at Rs 59,309 crore as on June end, with bank loans accounting for 28 percent of the total share, higher than 23 percent a year ago. The share of non-convertible debentures (NCDs) in the overall funding mix, on the other hand, reduced to 25 percent as on June end from 27 percent a year ago.
“Banks have been continuing to fund highly rated and well managed NBFCs over the years. With a change in the interest rate scenario (with an increase in interest rate expected by debt investors), the rates at which mutual funds have been willing to invest in NCDs have been more difficult to lock in," said Ashwin Mallick, head of treasury department at Indiabulls Housing Finance.
"It is pertinent to note that some leading NBFCs, Indiabulls Housing especially has pivoted its business model to being complementary to the Banks through aggressively pursuing co-lending with 7 partner banks," he said.
Shriram City Union Finance (SCUF), whose total borrowing stood at Rs 32,921 crore as on June 30, saw its share of bank borrowings in its overall liabilities mix rise to 52 percent during April-June from 50 percent during previous quarter, and 48 percent last fiscal.
“If you look sequentially, the market borrowings and retail borrowings have remained at the same level while there is a 2 percent reduction in securitisation, which has gone into bank borrowing,” Y.S. Chakravarti, SCUF MD and CEO, told Moneycontrol.
As per Manushree Saggar, vice-president at ICRA Ratings, bank credit to NBFCs and housing finance companies (HFCs) has moved up steadily over the last five to six months as the growth in the assets under management (AUM) resumed.
Her comments are in line with the Reserve Bank of India’s (RBI) monthly sectoral credit data which showed that banks’ outstanding credit to the NBFC sector increased 21 percent on a year-on-year (y-o-y) basis to Rs 11.01 lakh crore as on June 17.
Of the total, banks’ credit to HFCs grew 12 percent on year to Rs 2.8 lakh crore. “Bank interest rates were favourable as against capital market funding for PSUs and other large and high-rated entities, which led to them shifting from capital markets to banks,” Saggar said.
Another reason for NBFCs to opt for bank loans is the slow transmission of interest rates seen in loans linked to the marginal cost of funds-based lending rate (MCLR), experts say.
About 40 percent of banks’ floating rate loans are linked to an external benchmark which leads to immediate repricing in the loan. MCLR-linked loan rates, however, are decided by a bank’s asset liability management committee (ALCO) and do not necessarily match the quantum of rate hike of the RBI’s.
The RBI has till now raised repo rates by nearly 150 basis points in three consecutive sessions to 5.40 percent presently.
“A significant portion of the NBFCs’ loans from banks are MCLR-linked. Historically, bank MCLRs have risen with a lag and to a lower extent than repo rate hikes,” said Krishnan Sitaraman, senior director and deputy chief ratings officer at CRISIL.
“In debt capital markets, however, interest rates typically rise faster and to a greater extent as compared to bank MCLRs in a rising interest rate scenario. In the current situation, NBFCs shifting more of their borrowings to banks is a win-win development for both,” Sitaraman said.
Banks are also comfortable lending to NBFCs as their balance sheets are also seeing an improvement, with expectations of steady asset quality going ahead, he added.
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